United States

Balancing act for hard pressed supply chain

Vast swings in the rate of installations, falling prices, new technologies and a lack of long-term federal policy signals have unsettled companies across the US wind energy supply chain.

Investment roadblock...suppliers have no clear vision of road ahead
The pre-recession boom that helped drive US wind installations to an unprecedented 10GW in 2009 also fuelled investment in turbine production capacity. But declining demand in 2010 has seen wind power additions drop by half, while cheap natural gas has pushed down the prices that wind producers get for their power. The result is that turbine original equipment manufacturers (OEMs) are aggressively competing in a buyer’s market, and the effects are being felt by the companies that supply them with parts and services.

"A big challenge for OEMs is that they need to sell turbines, and today that means prices have to be lower than ever," says Ed Weston, director of GLWN, a group that advises companies looking to enter the wind sector.

"That puts special pressure on their supply-chain strategies. Supply-chain companies are under incredible pressure to cut their costs so that their customers can remain competitive." Some suppliers are concerned they may not be able to hold on, he adds, due to cost pressures at home and increased competition from overseas suppliers subsidised by their home governments.

These pressures come at a time when the cost of raw materials like steel and copper is rising, adds Matt Kaplan, a senior analyst at IHS Emerging Energy Research.

"Even though commodity prices are going up, a lot of component suppliers have been letting those increases erode their margins instead of passing them on," he says. "That is really showing how competitive this market is. But at the same time that’s not long-term viable strategy for a business to continue."

Time for lean thinking

A viable strategy, of course, is what is being sought, and Kaplan sees a growing interest in adopting leaner manufacturing processes to increase efficiency and cut costs. "There’s still potential to draw on industries like the automotive sector, where automation has been key, and bring that into the wind business," he says.

Diversification of risk is another part of the solution, and tapping into other wind markets is one way to do that, says Kaplan. For example, US-based bearing manufacturer, Timken, has found some success in the Chinese marketplace, and also has plants in Europe and India. If one region’s installations are reduced, being in another region where they are up may be able to offset the challenges, Kaplan says: "It’s sort of a balancing act."

It’s an approach that is not limited to the component side of the business. Engineering, procurement and construction contractors are increasingly looking north to Canada, a market with thousands of new megawatts of wind set to be built over the next five years.

Broadening product offerings is another way companies are responding to the changing market. LM Wind Power, forced to lay off workers at its North Dakota blade plant earlier this year, acquired Encore Power Services, a generator repair company, in January. Some transportation companies are starting to carve out a niche in the operations and maintenance side of the business, Kaplan says, transporting parts to support projects that are already in operation.

Flexibility is particularly important at a time when turbine OEMs are competing on more than just cost. All the major players, says Kaplan, are introducing new products in an attempt to increase production and lower the cost of energy. Hub heights of 100 metres, up from the standard 80 metres, are increasingly common. Larger rotors are accompanying the move to lower wind-speed sites and there is a growing trend for direct drive and permanent magnet technologies.

But keeping up with those advancements puts extra pressure on supply-chain players, says Kaplan. "It’s up to the suppliers to adapt and change quickly," he says. "There’s a lot of opportunity for companies to really think about what the OEMs are looking for in their next-generation products and find ways to work with them to help bridge some of the technology gaps."

Long-term view

Giving suppliers the long-term view they need to make the necessary investments is a major issue for the US market. A grant programme paying 30% of project costs, implemented in 2009 to help overcome investment roadblocks in the wake of the financial crisis, ends this year. The federal production tax credit, which pays $0.022/kWh for the first 10 years of a project’s life, expires at the end of 2012 with uncertainty about its renewal.

The American Wind Energy Association’s (AWEA) attempts to get the government to enact a federal renewable energy standard (RES), which would require a minimum percentage of the nation’s electricity to come from wind and other green sources, have borne no fruit. In fact, progress on an energy policy of any kind is subject to the deep political divisions in US legislature.

"AWEA’s top priority by far is a long-term stable policy," says Tom Maves, deputy director of manufacturing and supply chain. "Not only will we install more wind if we have that but, as far as I’m concerned, the most important thing is it will allow manufacturing to continue at a stable pace."

Demand for a clear vision

A lot of supply-chain investment in the US to date has been designed to maximise the benefits of localisation, including timely delivery, lower transport costs and the elimination of exchange-rate risk.

"But now you get to that next level where we need some sort of an environment that allows people to make a multi-year business case," says Kevin Hazel, vice-president of supply-chain management for Siemens.

"A lot of the companies that we talk to are ready to do something, but they’re a little bit put off by the whole issue of the lack of an energy policy in America."

"Tell us what the future will look like. What will this country support in terms of policy? With that clarity, the supply side will make the right decisions," Hazel says.

Yet, the US is still seeing investment by suppliers of generators and gearboxes, points out Kaplan. Spain’s Ingeteam is opening a factory in Wisconsin this year to make generators and converters for the North American market. There are also investments in segments of the supply chain that have traditionally been underserved. Last June, URV USA, a subsidiary of Finnish firm URV Foundry, announce plans to open the US’s first wind-dedicated foundry in Michigan to cast bedplates, which form the floor of the nacelle, and hubs for turbines.

"I would remind everyone looking at this industry that while we’re projecting more moderate growth in the US market, it’s still around the 6GW range, which is a large opportunity in itself," he says.

CUT-THROAT COMPETITION INCENTIVES CAN COUNTER INTERNATIONAL THREAT

US manufacturers find themselves competing with entire nations rather than stand-alone companies, says GLWN director Ed Weston, making an already difficult market even tougher."Many countries are now competing, like companies, for jobs. In the past, if you were a manufacturer, your competition was another manufacturer. Today," Weston says, "it may be a country behaving like a manufacturer. That makes for a tough competitor."

Access to low-cost components from abroad could have an impact on original equipment manufacturer (OEM) sourcing strategies, agrees Matt Kaplan, a senior analyst at IHS Emerging Energy Research.

Local credits"I think that’s a real threat on the industry because pricing is really cut-throat at this point. If OEMs can find components from abroad that are of good quality and that are being offered at a lower landed cost, they might switch."

More manufacturing incentives could help bridge the gap, says Weston. He points to the rules of Michigan’s renewable-energy target, which give bonus credits for projects utilising equipment manufactured in the state. "If expanded to a national basis, that concept might be a shot in the arm for US manufacturers."

The market itself should help put a check on how far afield manufacturers are willing to look for parts to supply their US assembly plants, says Kaplan. While a significant number of towers are being imported, particularly in California and the Pacific Northwest, he believes OEMs will be more hesitant to seek out new and less familiar suppliers of more technologically sophisticated components like generators and gearboxes.

"If there’s one thing that OEMs do not want in the market right now it is any sort of failure or increased risk of failure in their products," Kaplan says.

"Competition is so cut-throat that if there are serious faults or flaws, customers have plenty of choices and they can switch to another company very quickly."

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